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Year-end: Put This Year's Investment Performance in Perspective

How can you assess your investment portfolio’s performance in 2018? The year was full of wild swings in the financial markets, so your own results may well have bounced around quite a bit, too. But you can still get a clear picture of how you did if you keep your investments’ returns in the proper perspective – by making sure your expectations are relevant, realistic and reviewed.

Let’s look at how these terms can apply to a meaningful evaluation of your investment progress:

Relevant – Many investors compare their portfolio returns to a popular market index, such as the S&P 500. But this comparison is not really valid for a variety of reasons. For one thing, indexes are typically not diversified across different types of investments – the S&P 500, for instance, only tracks large U.S. companies. But your portfolio should consist of a broad range of investments: domestic and international stocks, bonds, mutual funds, government securities and so on, appropriate for your goals and risk tolerance. Also, your portfolio’s performance will be affected by your contributions and withdrawals, while market index returns are not. So, instead of measuring your results against an index – and possibly worrying about underperformance – you’re better off establishing relevant expectations of your investment returns, based on your specific goals. So, for example, if you want to retire at age 62, you’ll need to know the rate of return you need to achieve this goal – and then compare that desired return with your actual results.

Realistic – Ideally, of course, you’d like really high returns with really low risk – but that’s really not feasible. To get high returns, you’ll need to invest aggressively, which means you’ll need your portfolio to be heavily weighted in stocks. However, stocks are also riskier than more conservative investments, such as bonds or government securities. So, you’ll need to be realistic in what you can expect from your portfolio. You can shoot for high returns and accept the higher level of risk, or you can lower your expectations in exchange for greater stability.

Reviewed – The performance of the financial markets – and also your own portfolio – will fluctuate from year to year. Consequently, it’s important to review your portfolio’s results and the progress you’re making toward your goals on a regular basis, possibly with the help of a financial professional. In these reviews, you may conclude that you’re doing fine, or you might discover that you need to rebalance your portfolio by realigning your investments with your goals and risk tolerance, or perhaps make other adjustments – such as changing the amount you invest – to get you back on track. In addition, you may even need to re-evaluate these goals in response to changes in your life – a new job, marriage, new child, and so on – as these changes could affect the rate of return you need from your investments.

As you look back on 2018, and look forward to 2019 and beyond, take a holistic approach to how you evaluate your investments’ performance. By looking for relevance, being realistic about what you can expect, and reviewing your portfolio in the context of your goals, risk tolerance and changing circumstances, you can gain a thorough understanding of where you are, where you want to go – and how you can help yourself get there.